Restaurant Brands International Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Restaurant Brands International Inc. operates as a quick service restaurant (QSR) company, owning and franchising iconic brands such as Burger King, Tim Hortons, Popeyes and Firehouse Subs across various international markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Restaurant Brands International (RBI) is one of the world’s largest quick service restaurant companies, structured as a global franchisor. This entails that the company earns revenue primarily from franchising fees, royalties based on a percentage of sales from franchisee-operated restaurants, and also operates a few company-owned stores, particularly in the US and Canada. These company-owned locations are primarily used to showcase and test new strategies. RBI’s global restaurant count is 30,738 at the end of the fiscal year 2023, across 100 different countries and US territories.

  • Brand Portfolio: RBI’s portfolio consists of Burger King (BK), Tim Hortons (TH), Popeyes (PLK), and Firehouse Subs (FHS), each with their unique brand equity and customer base.
    • Burger King (BK): The second-largest burger chain worldwide, offering a diverse menu of flame-grilled burgers, side items, and desserts.
    • Tim Hortons (TH): A Canadian icon, primarily known for coffee, baked goods, and quick meals, with a strong presence in Canada and increasingly in international markets.
    • Popeyes (PLK): Famous for its Louisiana-style fried chicken and sides, Popeyes has shown strong growth in recent years.
    • Firehouse Subs (FHS): A US-based sandwich chain known for its signature hot subs and community engagement. Acquired in 2021.
  • Revenue Streams:
    • Franchise Revenues: RBI’s primary source of revenue comes from royalties collected from its franchisees, usually a percentage of their sales. These royalties are a very stable form of revenue that does not require a lot of incremental investment and can quickly expand with growth of the restaurant count.
    • Franchise Fees: The company also charges initial franchise fees and renewal fees.
    • Property Revenues: A smaller portion of revenues come from leases and rentals.
    • Advertising and Other Revenues: The company also generates revenues from marketing, advertising and other miscellaneous fees.
  • Geographic Distribution: The U.S. and Canada represent the largest markets for all four brands, but international presence accounts for 40-50% of the system-wide sales for all four brands.
    • Canada: TH has a major presence here, while BK and PLK have a much smaller footprint. Canadian sales accounted for 41% of the companies consolidated revenue in 2023.
    • United States: FHS has a solely domestic footprint while BK and PLK have a substantial presence in the US. US based revenue accounted for 38% of the total revenue for the year 2023.

  • Industry Trends: The QSR industry is highly competitive and is seeing major trends including the increasing consumer preferences for convenience, healthier options, and technology integration.

  • Digitalization: Consumers are increasingly using digital platforms and delivery services. Companies that invest in the technology to allow for easier ordering and delivery stand to gain market share.
  • Healthier and Customized Options: The consumer base is becoming more health-conscious, they have shown that they desire options that cater to their individual tastes. * Emphasis on Value: In a challenging economic environment, customers are looking for value menus and promotions, which creates an added emphasis on lowering costs and maintaining margins.
  • International Growth: Many QSR chains are looking at international markets for higher levels of growth. RBI has a significant footprint outside the US and Canada that they plan to leverage.

  • Competitive Landscape: The QSR industry is extremely competitive with many local and international players. Some key competitors include McDonald’s, Starbucks, Yum! Brands, and various other fast-food and quick-service restaurant chains.

    • McDonald’s represents the largest competitor due to its brand recognition and global size. It also has been able to make a big push towards technology and better menu options that attract the younger generation.
    • Starbucks also represents a formidable competitor in the quick service segment, with its focus on specialty coffee and beverages. It has a major edge over RBI in coffee and has shown more success in establishing a strong international presence.
    • Yum! Brands is a major player which focuses primarily on the chicken, pizza and Mexican food segments, including brands like KFC, Pizza Hut, and Taco Bell. Popeyes has similar offerings compared to KFC and has enjoyed similar success.
  • What Makes RBI Different?: RBI stands out through the strength and diversity of its iconic brands. The company has put an emphasis on technology, franchising, and value-driven offerings as core aspects of its strategy. The brand’s focus is on sustainable growth and expansion by leveraging their global presence and focusing on their unique local aspects.

Financial Performance

Analyzing the financials of RBI provides a clear view of the current state and the opportunities that are available to the company, and also helps highlight the areas of risk that must be considered.

  • Revenue Growth: RBI has consistently grown revenues since 2020 and revenues have increased annually. The revenue growth is mainly coming from the increase in systemwide sales, which have also seen a similar uptrend. However, the same has not translated directly to bottom line growth as the expenses have also risen substantially during this time period. *The total revenue for 2023 was $6.9 Billion a 10.5% gain over the previous year.
  • Profitability: While overall revenues have grown, the operating margins of RBI are still below those in the past. The company is focused on cost optimization efforts, improved efficiency, and better pricing to enhance profitability.
    • While the overall income before taxes for 2023 was $1.05 billion, and net income was $873 million, both are down significantly from 2022. This is attributable to the higher operating expenses, interest payments and currency translations.
    • The company has been focusing on decreasing its capital expenditures to increase its free cash flow and profits.
  • Debt & Leverage: The debt-to-equity ratio at the end of 2023 was 2.25, down from 2.57 in 2022 and 3.2 in 2021. Although down, this does demonstrate a substantial level of leverage at the company and represents a risk that must be monitored by investors.
    • The cash position of the company has improved, however. At the end of 2023 the company had around $1.4 billion in total cash compared to $1.1 billion in 2022.

  • Cash Flow: RBI is still seeing strong and stable cash generation as they are a franchise company with high recurring revenues. This helps reduce the impact of high debt and any cyclicality in demand.

  • Free cash flow from operating activities reached $1.65 billion in 2023 which was up significantly from $1.35 billion in 2022.

Moat Analysis

RBI does have some attributes that lead to competitive advantage and create a moat around their brands, however, a wide moat rating would be overstating this. The presence of a network effect and cost advantages in scale are not as pronounced in this sector.

A moat rating of 3 out of 5 indicates that RBI has a moderate moat, which is supported by some competitive advantages, however, these advantages are not as entrenched as the highest rated companies, and could potentially be overcome by competitors.

  • Brand Recognition (Intangible Asset): RBI’s brands (Burger King, Tim Hortons, and Popeyes) are internationally known with strong global recognition and good customer loyalty. This is a crucial aspect for any QSR business that gives the companies pricing power and enables them to withstand competition by other brands.
  • Franchising Network (Scale): The expansive network of franchised locations provides a wide reach and a stable revenue stream. This creates an advantage, however, is not as significant as having full control of the distribution channels and revenues.
  • Customer Switching Costs: These costs are only moderate, since in the QSR market switching between similar brands is quite easy for the consumer and many different options are available.

Moat Risks and Resilience

RBI faces a number of risks that could weaken its moat over time:

  • Competitive Industry: The QSR industry is very competitive. New restaurant chains and new types of quick food delivery options can erode their market share.
  • Changing Consumer Preferences: Shifts towards healthier or more diverse dining options could have the company scrambling to adapt to new trends.
  • Technological Disruption: Inability to adapt to technological changes can lead to weaker customer loyalty. The company would have to invest in online platforms, mobile ordering, delivery systems, and marketing to remain competitive.
  • Franchisee Misalignment: RBI is dependent on franchisee execution. If franchisee performance is not up to par it can erode brand reputation and create legal and financial risks.
  • Macroeconomic Factors High levels of inflation will force consumers to seek cheaper options from competitors, increasing the demand for value meals. RBI would have to be more effective at cost leadership while maintaining the same level of quality. The recent recession has also affected consumer spending, and if these conditions persist it could make the company more volatile.

The resilience of RBI lies in its globally established brands and its recurring franchise revenues. They have shown that by focusing on brand loyalty, they can regain business after downturns. They also have a proven ability to adapt to evolving trends and to enter new international markets.

Understandability

The company’s operations are primarily based on franchise systems. While understandable, a deeper analysis of the financial statements and strategies is complex.

  • Complexity of Financial Statements: While the business model of franchising is relatively understandable, analysis of financial reports and the metrics like ROIC, EBITDA, and same store growth can be complicated.
  • Intricacies of Franchise Agreements: Analysis of the structure, royalties, and incentives of franchise agreements requires deeper reading into the footnotes.
  • Variations of Regional Operations: The company operates many different regions with different revenue sources, cultural dynamics and growth trajectories which makes the overall company difficult to evaluate without breaking it into segments.

A rating of 2 out of 5 indicates that RBI’s business is fairly complicated and understanding their various aspects can be tricky. It would require deep research into financials, footnotes and performance metrics, and the different segments of the company to make well informed decisions.

Balance Sheet Health

RBI has a mixed track record regarding its balance sheet. While leverage is high, its strong cash position helps reduce the risk of bankruptcies. Its quick response to changing market conditions and management focus on optimizing profitability are positive signs.

A rating of 3 out of 5 indicates that RBI’s balance sheet is somewhat healthy, but has notable risks that must be watched. The company is not in extreme financial danger but also doesn’t have as safe of a financial structure as it could have.

  • Debt Levels: RBI has a significant amount of debt on its books, and it is currently carrying high levels of debt to fuel its expansion plans, mainly from the Firehouse Subs acquisition. High debt levels present risks to long-term profitability and resilience of the company, and also put a significant weight on cash flow.
  • Cash Position: The company’s cash position has recovered from previous years with substantial growth and reserves for capital expenditures and debt repayments. This does provide some stability and helps protect against potential downturns.
  • Profitability and Free Cash Flow: RBI still has a lower profitability and free cash flow compared to its peers. If profitability and cash flows continue to improve, the management can continue to deleverage the company and improve its overall balance sheet health.

Recent Concerns and Management Response

  • Concerns about Inflation and Consumer Spending: With the recent global inflation and slowdown, companies have seen consumers shift their spending habits from quick service restaurants, or choose to spend less. While RBI acknowledges the challenges, they are focused on value and promotions to protect their market share. Additionally, long term agreements with suppliers have been set up to reduce input costs and boost overall margins.
  • Impact of Economic Slowdown: As the economy slows down, the sales and growth in the QSR sector are under pressure. RBI has seen the effects of this on its global revenue numbers. However, they are focusing on a long term view and have started using strategies to cut costs and improve efficiencies so that they can navigate this uncertainty.
  • Underperformance of Firehouse Subs: Since the acquisition of FHS in 2021 the company hasn’t been able to provide a positive and convincing picture for the growth and performance of the business. The company acknowledges that there are still improvements to be made in terms of profitability and overall operations, and plans to focus on franchisee growth and brand consistency.
    • Management has taken steps to improve franchisee retention through targeted marketing efforts, and improving overall menu quality.